BIR Ruling [DA-495-06]

August 11, 2006 BIR RULING [DA-495-06] 28 (A) (5); RMR 1-2001; DA-090-01; 008-99 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. E.C. Alcantara Tax Division Gentlemen : This refers to your letter dated May 23, 2006 requesting on behalf of your client, Texas Instruments (Philippines), Inc. ("Texas"), for confirmation of your opinion that the remittance to Texas by its Philippine branch office of profits earned from the latter's business activities registered with the Philippine Economic Zone Authority (PEZA) or the use of such profits by Texas in payment of its additional subscription of the shares of stock of TI (Phils.) Inc. is not subject to branch profits remittance tax under Section 28(A)(5) of the Tax Code of 1997, as amended. It is represented that Texas is a corporation duly organized and existing under and by virtue of the laws of Delaware, USA; that it has a branch office in the Philippines operating by virtue of the authority granted by the Securities and Exchange Commission (SEC) under SEC License No. 857; that the said branch office was formerly registered with PEZA as a producer and exporter of semiconductor products and other components thereof under Certificate No. 79-02 dated March 5, 1979; that after years of operation, Texas decided to transfer the PEZA registration of its branch office to its subsidiary, TI (Phils.) Inc., a corporation duly organized and existing under and by virtue of Philippine laws; that such transfer of registration, inclusive of all subsequent PEZA-approved and registered projects and all rights and obligations arising therefrom, was approved by PEZA in a resolution issued on December 29, 2000; that PEZA subsequently issued a Certificate of Registration to TI (Phils.) Inc. as evidenced by the Registration Agreement executed on March 1, 2001; that on the same date, Texas transferred a substantial portion of the assets and liabilities of its branch office to TI (Phils.) Inc. in exchange for its shares of stock; that as a consequence, beginning March, 2001, its branch office ceased its business operations and has become dormant since then; that during the existence of its PEZA registration from March 1979 to February 2001, its branch office earned profits arising from the operations of activities registered with PEZA; that these branch profits were not transferred by Texas to TI (Phils.) Inc; that these branch profits remained in the books of its branch office and have not been repatriated to Texas; that despite its status of dormancy starting March, 2001, its branch office continued to earn interest income from its other investments (cash deposits) with the house bank at TI US, a company domiciled in the United States; that Texas has decided to officially close its branch office after years of dormancy; and that before it undertakes the legal closure of its branch, Texas wishes to have the income maintained in the books of its branch, consisting of branch profits and interest income, either, to be (1) repatriated to Texas or (2) invested in TI (Phils.) Inc. as additional equity investments. In reply, please be informed as follows: caADSE Pursuant to Section 28(A)(5) of the Tax Code of 1997, as amended, any profit remitted by a branch to its head office is subject to a 15% branch profits remittance tax except profits earned from those activities which are registered with the Philippine Economic Zone Authority. A branch office in the process of winding up its business activities registered with PEZA remains entitled to the 5% preferential tax regime. Moreover, in BIR Ruling No. 008-99 dated January 9, 1999, it was held that the gross income earned by the company in the sale of its factory building in the course of winding up its registered business is subject to the 5% preferential tax rate. Further, in BIR Ruling No. DA-090-01 dated May 16, 2001, it was held that the gross income earned on the sale of factory located within the Ecozone in the course of winding up its registered business within the Ecozone is likewise subject to the 5% preferential tax rate. Such being the case, the remittance of branch profits from the Philippine branch to Texas is not subject to branch profits remittance tax under Section 28(A)(5) of the Tax Code of 1997, as amended, since the profits in its books for the years 1979 to 2001 or from the time of its PEZA registration until the transfer of its PEZA registration to TI (Phils.) Inc. arose from its business activities registered with PEZA. Furthermore, the remittance of these branch profits by the Philippine branch to Texas will be done to wind up its PEZA registered business in preparation for its legal closure. In case Texas decides to use the branch profits in payment for its additional subscription of shares of stock in TI (Phils.) Inc, the said reinvestment of the branch profits shall be considered as a "constructive branch profits remittance". (Par. IV. 7 of RMR No. 1-2001) However, the said remittance is exempt from the branch profits remittance tax since it will be done by the Philippine branch to finally wind up its corporate affairs of which transaction continues to be covered by the 5% preferential tax treatment under R.A. 7916. Finally, the Philippine branch office is subject to Philippine tax only on its income from sources within the Philippines pursuant to Section 23(F) of the Tax Code of 1997, as amended. Considering that the interest income arose from its cash deposit with the house bank at TI US, which is located outside of the Philippines, the interest income is not considered as income from within the Philippines and thus, not subject to Philippine tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service